>TATA MOTORS (MERRILL LYNCH)

Expect domestic recovery, JLR to follow

■ Maintain Buy, potential upside 30%
Following a Rs 25bn consolidated loss last fiscal, we forecast a strong reversal over next 2 years driven by both domestic business and JLR. We believe that surprises will come from lower costs, especially in JLR, and also the extent of domestic recovery (consensus estimates sharply lower). Our PO of Rs 365 (earlier Rs 420) factors higher debt position, which lowers imputed equity value.

■ We expect strong operational growth
We expect consolidated EBITDA to increase to Rs 79.7bn by FY11E (up from Rs 20.1bn last year), driven by (1) demand revival in CV business (trucks/buses/light vehicles), thanks to higher industrial production and government stimuli, (2) sharp cut in JLR losses on significant cost-saving initiatives, and new product launches, and (3) rebound in key subsidiaries, in line with domestic recovery.

■ Forecast rising cash flows, JLR to be self sustaining
Despite expected increase in operating cash flows, we expect both Tata Motors and JLR to resort to independent fund raising in FY10E, to finance capex and other operating requirements. However, in FY11E, we expect Tata Motors to generate surplus cash, facilitating debt repayment, and JLR to be self sustaining.

■ Revised PO factors additional debt
Our revised sum of parts PO is based on (1) standalone business at 8x EV/EBITDA FY11E, slight premium to previous mid-cycle sector multiple, and (2) JLR at 0.25x EV/Sales FY11E, 30% discount to long term European auto sector average, assuming debt of €2.1bn (incl SPV) and (3) subsidiaries, in line with domestic peers in constituent businesses, with holding company discount of 20%.

To see full report: TATA MOTORS